WELFARE STATE GIVES RECIPIENTS INCENTIVE TO STAY POOR

The United Kingdom's welfare system has trapped its recipients into dependency and a life of poverty due to regulations that penalize saving, says Tim Congdon of Lombart Street Research.

Because the programs are means-tested, applicants are disqualified for assistance if they possess assets above a certain sum. Thus the poor do not save because any saving is likely to reduce their overall consumption. After all, if they save when their incomes are good they will not receive any benefits from the government in periods of low or no income.

As a consequence, recipients are now reliant on the state to provide them with virtually all of their retirement income and financial support in the event of unemployment or illness. Congdon says that apart from wages, their dependence on the state is total:

The average wealth per adult in the UK is over 100,000 pounds, yet over 80 percent of UK's population has wealth of less than 100,000 pounds.

The bottom half owns only 5 percent of the nation's wealth, which is consumed in housing and small amounts of money.

Most of the bottom quarter -- those who live primarily in public housing -- have no assets whatsoever.

The British government has responded by setting up a Child Trust Fund, where all families of newborn babies will receive a lump sum payment to facilitate their transition into child rearing.

But Congdon says this does nothing to give low-income earners incentive to save. Perversely, the 10 to 15 million poorest adults will spend all of the money as soon as they can so that they will not be disqualified from means-tested benefits.

Source: Tim Congdon, "How the Welfare State Encourages the Poor to 'Spend, Spend, Spend,'" Journal of the Institute of Economic Affairs, Volume 24 Number 1, March 2004.